The Association of Ethiopian Insurers has submitted a request to the National Bank of Ethiopia (NBE) two weeks ago for the approval of the formation of the first reinsurance firm with a one billion Birr subscribed capital.
The establishment was initiated following the issuance of the Reinsurance Company Establishment Directive by the NBE in April, 2014, according to Kiros Jirane, president of the Association of Ethiopian Insurers and CEO of Africa Insurance SC.
After the issuance of the directive, the Association established an organizing committee that is chaired by Kiros for the establishment of the reinsurance firm. The committee has 15 members composed of 13 chief executive officers of the insurance firms and two from the Ethiopian Bankers Association (EBA), including the presidents of Addis International Bank and Bunna International Bank.
Reinsurance, which is also known as “insurance for insurers” or “stop-loss insurance”, is a practice of insurers transferring portions of risk portfolios to other parties by some form of agreement in order to reduce the likelihood of having to pay a large obligation resulting from an insurance claim. The intent of reinsurance is for an insurance company to reduce the risks associated with underwritten policies by spreading risks across alternative institutions.
Reinsurance companies will be formed as share companies, wholly owned by Ethiopian nationals and organizations. No shareholder shall have more than a five percent share in the company. The capital of the company will be at least 500 million Br, which ought to be fully paid up in cash and deposited in a blocked bank account, according to the directive issued by the central bank.
The company will have 100,000 shares with a pur value of 10,000 Br each. The initial investment cost of the project, including fixed investment, preoperational expenditure and working capital is estimated at 32.6 million Br, according to a feasibility study conducted by the Ethiopian Insurance Corporation (EIC).
The absence of local reinsurers means that 25pc to 30pc of the premiums collected by domestic insurers had to be paid up to foreign reinsurers in the form of reassurance premium, according to the feasibility study by the EIC. The study by the EIC includes organization of the company, underway capacity, and implementation schedules.
In the 2012/13 fiscal year, the 17 insurance firms in the country paid 1.2 billion Br premium for the reinsurers from the 4.8 billion Br they collected from their clients, according to a data from the NBE.
“Members of the association have already promised 620 million Br for the establishment and the remaining money will be raised from availing shares to the market,” Kiros told Fortune.
The four new insurers including, Berhan Insurance S.C, Lucy Insurance S.C., Tsehay Insurance S.C and Bunna Insurance S.C are not included in the establishment of the reinsurance firm as they are not members of the insurers association; they have been told to be members before the end of February 2015.
“We are awaiting board approval to be a member of the insurer association and become the founding members of the company,” Alemseged Abreham, the CEO of Lucy told Fortune.
The organizing committee requested the NBE for the approval of the firm and to open a closed account for the firm two weeks ago, which will be used to collect the establishment capital and it is waiting for a response from the NBE, according to Kiros.
The organizing committee is also in the process of establishing an office to run the project and to update the feasibility study that was conducted by the (EIC) and Public Finance Enterprise Agency, on July, 2012 about the prospects of reinsurance firm establishment. From 13 individuals who submitted their CVs for the manager position of the project office, we will select and hire one after evaluating the documents in the coming two weeks, said Kiros.
The insurance industry had an aggregate capital of two billion Br by the end of 2013/14 fiscal year, an increase of 500 million Br from the preceding year. The number of insurance firm branches has also grown to 332 by adding 59 new branches during the last fiscal year, 55pc of which are located in Addis Abeba, according to data from the NBE.
The major global reinsurers include Munich Re, Swiss Re, Hannover Re, and so on. Ethiopian insurance companies mainly rely on Munich Re, Kenya Re and Swiss Re.
The company will be fully operational in the coming six to 12 months, according to Kiros.
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